Why Trump can't win the trade war

The dumbest and most avoidable financial crisis in history

An old piece of advice that has been handed down from generation to generation is, “Don’t start something that you can’t finish.” I’m not sure that Fred Trump ever passed along this bit of simple wisdom to his son, but if he did, little Donald likely didn’t listen.

More current advice to the president might sound more like Stinger’s (played by James Tolkan) advice to a young Maverick in the original Top Gun: “Your ego is writing checks that your body can’t cash.”

Image created by ChatGPT

It’s unlikely that even the full faith and credit of the United States will be able to cash the checks that Trump’s ego is writing these days. Financial markets have lost more than $10 trillion (that’s trillion with a “t”) under Trump so far and the rout shows no signs of stopping as the trade war ramps up, Wednesday’s rally notwithstanding.

Mr. Trump is a self-described “Tariff Man,” but before launching his latest tariff war, he should have considered the advice that Fred Trump and others should have given him. Instead, Trump’s strategy is akin to that of the Underpants Gnomes from South Park:

Phase 1 - Impose tariffs

Phase 2 - ??????

Phase 3 - Profit!

To be clear, I’m not totally sure what Trump’s thinking is here. I don’t think anyone knows for sure because he has given a plethora of often-contradictory goals and explanations. He has claimed to want to increase US manufacturing, promote free trade, raise tariff revenues, stop smuggling, and punish China. The evidence would suggest that Trump just wants a trade war for its own sake.

Nevertheless, on Wednesday, Trump did provide some relief to markets with a 90-day pause on tariffs against all countries except China, for which he raised the tariff rate to 125 percent. Trump also left 25 percent duties on Canadian and Mexican imports that are not covered under the USMCA. Trump’s universal 10 percent tariff remains in place for other countries.

The news provided some relief to markets, but the on-again/off-again nature of the trade war makes it difficult for consumers and businesses to plan, and the sword of Damocles hanging over our trading partners, the knowledge that Trump’s tariffs on them are only suspended and not paused, makes it difficult or impossible to put together a meaningful coalition against China.

Many consumers and businesses may take the opportunity to stock up on staple items during the pause, but such behavior can drive up prices. This strategy runs the risk of being stuck carrying high-priced inventories if Trump later decides not to resume the tariffs (spoiler alert: he will) or if he adopts a different strategy. Longterm planning is not possible in the current climate.

The problem is that Donald Trump cannot win a trade war, particularly one against China. To put it in poker terms, China does not have all the cards, but it does have an hand full of aces.

The first ace is that China holds a large share of US Treasury debt. A few months ago, China’s holdings were estimated at $759 billion. One potential weapon that China could use is to dump a large part of the US debt that it holds.

Flooding the market with Treasury certificates would have the effect of lowering demand for the safe-haven investment. The value of US debt would plummet, and yields and interest rates would rise. Overnight, it would become much more expensive for the US to finance its deficit spending.

The Treasury selloff would also cause the value of the dollar to drop, which, ironically, is something that Trump and his advisors have advocated in the past. MAGA financial advisors believe that a weak dollar would help to erase the trade deficit (as Milton Friedman explains, trade deficits are not really a bad thing) and allow the federal government to pay back debt with devalued (i.e., inflated) dollars. In case you didn’t get that, weakening the dollar is inflationary.

This process may have already started. There was a large bond selloff on Wednesday, and there is speculation that China was behind the sale since it coincided closely with Trump’s imposition of 104 percent tariffs on the Asian giant, a move that has already been countered by China with another 84 percent tax hike on US goods being imported to China.

China’s second ace is its control over the rare earth industry. Rare earths are a set of 17 minerals that are vital components in high-tech consumer goods and military hardware. Over the past few decades, China has developed monopolistic control of the rare earth market.

If you think allowing China to control 97 percent of such a rare and important commodity is a bad idea, you’d be right. It might be possible that the only worse idea would be to launch a trade war against a monopoly that both your consumer economy and national security depend on without a backup plan. It’s that pesky Phase 2 that is problematic.

Our vulnerability is not a new thing. China shut off Japan’s supply of rare earths in 2010, prompting the Japanese to seek alternatives. In Trump Trade War I, China threatened a similar move against the US but never executed it as the world’s focus shifted from trade disputes to the COVID-19 pandemic. In December 2024, China banned exports of gallium, germanium, and antimony to the US in retaliation for American controls on microchip exports to China.

In Trade War II, the Trump Administration telegraphed American vulnerability by exempting Chinese rare earths from its tariffs. The problem with this strategy is that China can still embargo the materials from import to the US. If the Trump Administration knows we need rare earths, the Chinese know it as well.

And they have already fired a warning shot. A few days ago, China placed export controls on a number of rare earth minerals with technological and military applications. This is a signal that they are ready to shut off the spigot if Trump continues along his current path.

What would happen if China embargoed rare earths? The production of tech devices that use the minerals would plummet and prices would skyrocket. In 2010, rare earth prices in Japan increased by a factor of 10. High-tech US manufacturing would be hobbled. Commerce Secretary Howard Lutnick may fantasize about Americans installing screws on iPhones, but there will be no phone production in the US under a rare earth embargo.

Trump’s Phase 2 might include the annexation of Greenland for its rare earths or a mineral deal with Ukraine, but neither can be exploited quickly. Ukraine is still fighting for survival against Trump’s buddy, Putin, and Greenland’s mineral reserves haven’t been exploited already because of inherent difficulties in doing so.

I will agree that we need to follow Japan’s lead in challenging China’s dominance in the rare earth industry, but doing so in the middle of an (unnecessary) trade war is not a prescription for success. The White House has indicated that it is not serious about developing alternatives to Chinese control of rare earths through its attacks on the bipartisan CHIPS Act and crippling US microchip makers with tariffs.

So why hasn’t China invoked these options already? The most likely answer is that they, unlike Donald Trump, realize that our two economies are dependent upon each other. China could destroy our economy, but they would ravage their own economy in the process. Nevertheless, the farther Trump pushes them toward the brink, the more likely it is that they will invoke these “nuclear” options.

Finally, the third ace in China’s hand is that it is an authoritarian regime, not just a wannabe. It is a fantasy to think that Donald Trump could outlast President Xi as both economies crumble. The Chinese are adept at using martial law to control their population in ways that are not possible in the US (and thank God for that!), while Trump is already a lame duck who is limited by courts and midterm elections that cannot get here fast enough.

Trade brinksmanship also runs the risk of becoming military brinksmanship. Trade wars can easily turn into shooting wars, especially if one side sees an existential threat in the other. Few remember that the attack on Pearl Harbor was preceded by a trade war between Japan and the United States.

The current financial crisis is probably the most stupid and easily avoidable in world history. All Donald Trump had to do was nothing, but the president ignored the risks and followed his own whims and desire for a tariff war to remake the global economy. But when you tear down the global economy, you should have some idea of what should replace it.

Trump may not yet realize it, but he has painted himself into a corner and the country with him. On one hand is a global economic collapse. On the other is backing down and losing face. The longer he continues along this path, the deeper the crisis will become and the more likely it will be that the results are catastrophic.

NO NEGOTIATIONS: Europe finally retaliated against Trump’s tariffs on Wednesday, but the Washington Post reported that the EU tried to avoid escalating the trade war. Per the report, “European officials have offered ‘zero-for-zero’ tariffs on cars and industrial goods, as well as increased purchases of U.S. exports, from liquefied natural gas to soybeans,” but the Adminstration of the Tariff Man refused to negotiate.

It’s not about a fair deal. It’s about Trump’s belief that tariffs are a good thing for America and that the US economy needs to be fundamentally transformed (to coin a phrase).

That’s not going to end well.

AND THAT’S NOT ALL. Matt Yglesias echoed my own sentiments on the platform formerly known as Twitter when he wrote, “Something I would like sane conservatives to consider is the possibility that DOGE cuts to medical research, the Social Security Administration, and foreign aid are conducted with the same level of care and rigor as we see in trade policy but without the market feedback.”

Trump, Musk, and DOGE have been merrily ripping apart large parts of the federal government without understanding what those departments do or how their actions might affect the country and the world. We know that some of their actions are bad, such as firing medical researchers looking for cures for cancer and other diseases, but other Easter eggs of destruction won’t be discovered or understood for years or decades.

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